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Airline Insolvency Review final report published

Today the Government published the final report of the independent Airline Insolvency Review, set up in response to the collapse of Monarch Airlines in 2017. The ABI and its members have engaged with the Review team throughout the review process, attending workshops, meeting with the Review chair and his team, hosting member meetings with the Review team and providing evidence to help inform the Review’s work. Throughout the process, our positive engagement has been received well by the Review team and we are delighted that the chair and his team have considered our perspectives and key messages in making the recommendations published in the final report today. In particular, we welcome the Review’s agreement with our call not to mandate that travel insurance include cover for airline failure.

Overview

The Review has estimated that the likelihood of any of the top 13 airlines operating from the UK (carrying over 80% of the UK market) becoming insolvent in a given year is generally low but, if it were to happen, large numbers of people would be affected. The Review has already estimated that around 75% of passengers would need to access and pay for alternative travel home if they were stranded following an airliner failure, potentially costing substantial delay, cost and inconvenience. The Review concludes that for passengers to be protected in the event of airline failure, this gap should be addressed.

The Review does not think a ‘buyer beware’ approach will work, given how little travellers consider the risk of an airline failure. When asked, most passengers said they would not expect to be stranded, but if it  happened they would expect to be assisted, whether by the airline, their insurer, or the government. Therefore, the Review is recommending the Government establish the Flight Protection Scheme as a way of ensuring funding to return all passengers stranded in the instance of an airline failure. Crucially, this would be funded by the beneficiaries – passengers and airlines - rather than the taxpayer.

Key points for insurers

  • Review agrees with the ABI call not to make airline failure cover compulsory in Travel Insurance - after exploring the case to compel all travel insurance to include cover for airline failure, we are pleased the Review has ruled out using travel insurance as part of the solution for funding traveller repatriation following an airline failure.
  • Review recommends hybrid scheme to fund passenger repatriation – as expected, the Review has recommended that a hybrid scheme – The Flight Protection Scheme - be established which would see airlines required to purchase risk based securities and levy passengers to fund a cross industry funding pool.  The Review suggests that this could be largely reinsured by the commercial market.
  • Clarity to be provided on different consumer protections – we also welcome the Review’s recommendation to improve consumers’ understanding of different customer protections and how they should be used. This follows our calls for a gap analysis of protections as we believed certain groups were over protected, some adequately protected and some under protected.

Travel Insurance

The ABI engaged extensively with the Review team about the role travel insurance plays in providing consumer protection, but cautioning against looking at mandating travel insurance for airline passengers to fund reparation. The Review has agreed with the ABI and its members that mandating insurance would not solve the problem and would see many passengers paying for protection they did not need. They welcomed our evidence showing that 50% of travel insurance policies provided cover for an airline failure and they have agreed with us that more should be done to improve consumer understanding of different protections and how they can be claimed.

However, the Review has also identified an appetite for airline failure cover and an expectation from many consumers that it would already be included in their travel insurance policy (12% of consumers felt their travel insurer should be responsible for getting them home). The Review has suggested insurance providers and third-party comparison websites should do more to ensure customers understand what risks are covered by individual policies, so that consumers can make informed decisions. They have recommended that government sets up working groups, involving all parties, to enhance understanding of the nature and extent of travel insurance. The Review suggests that government should work with airlines to promote the provision of relevant information to passengers at the point of booking to nudge them into making better choices about financial protection.

Consumer protection recommendations

The Final Report notes that existing financial protection provisions already enable a large majority of consumers to recover money lost if they are yet to take their outbound flight, but offer recommendations to improve awareness and uptake of insurance, credit card, and payment system based protections.

The Review recommends that government should work with partners to help enhance existing refund protection and provide greater clarity by:

  1. Increasing consumer awareness and uptake of refund protection.
  2. Minimising unnecessary duplication of protection.
  3. Helping passengers to make a claim swiftly and easily.

The Review’s final report suggests that each of these areas is likely to require action by government, the Coordinating Body, the airline industry, insurance industry and the card payment sector. They recommend government creates a working group, bringing together representatives from each area to produce best practice guidance to meet all three categories above.

Funding - The Flight Protection Scheme

The Review is proposing a comprehensive scheme, the Flight Protection Scheme, to protect all UK-originating air passengers, with the associated costs met largely, if not wholly, by the private sector. The scheme would be coordinated by the CAA, and backed by requiring each airline serving the UK market to provide suitable financial protection based on the estimated cost of repatriating its passengers.

The Review proposes the scheme should be structured to require that security products be provided by each airline as the first line of defence covering the greater part of its repatriation exposure. Secondly, beyond this security, any additional losses would be met from a centrally managed fund built from mandatory airline contributions calculated by reference to UK originating seats sold. This would be used to pay for incurred losses, administrative costs (including those of the Coordinating Body), and re-insurance premiums, and over time to build up a general reserve to provide a measure of resilience. The fund and reinsurance layers of protection would pay out sequentially to the extent the failed airline’s security did not cover the costs of repatriating its passengers.

The Review estimates that on average the new scheme would in total cost less than 50p for each passenger protected. In accordance with the Review’s principle that the beneficiary should pay for protection, these additional costs will fall, directly or indirectly, on passengers. In part, this will reflect the explicit recognition of private costs that, under the current informal arrangements, are – in effect – subsidised by taxpayers. Overall, however, the Review does not expect them to have a measurable impact on supply and demand in the UK market for air travel.

In line with representations made by the ABI, the Review rightly notes that it cannot be assumed that all airlines will be able to obtain security at any cost. As a result, some may need to simply set aside capital of an equal value. The Review notes that further work would be needed to assess the availability and commercial pricing of the various forms of security acceptable to the Coordinating Body.

The ATOL scheme

Importantly, the Review recommends that the Flight Protection Scheme will only cover customers not protected via the ATOL scheme. In principle, no passenger who holds an ATOL Certificate should be taken into account when calculating an airline’s contributions to the Flight Protection Scheme – however the Review notes that in practice duplication cannot always be avoided.

The Review makes a number of recommendations to increase the commerciality and flexibility of the ATOL scheme. This includes potentially allowing travel operators to purchase a security (similar to the model for airlines described above) to offset against their responsibly to contribute to the Air Travel Trust (ATT). The Review also notes that the various limits and exceptions that are present in the current reinsurance arrangements of the ATT fund involve a theoretical risk to the taxpayer. If all of these gaps cannot be closed by a more comprehensive solution from the private reinsurance market, the Review’s recommendation is that the Government charge the ATT for acting as the final guarantor of these losses.

Next steps

The ABI has welcomed the recommendations of the Review’s final report and issued the following media statement:

“There are good recommendations in the Review to increase consumer awareness and the uptake of refund protection, which we strongly advocated for throughout the process. It has engaged positively with all stakeholders and we were glad to participate in stakeholder workshops and support the work of the Review team, helping them understand how travel insurance cover works alongside other consumer protections.”

The ABI will continue to engage with the government on the review’s recommendations and offer our input and support to the ongoing process following the publication of this final report.